Raising gold import duty is not the only solution to India's CAD troubles

New York: Gold futures fell 1 percent on Tuesday, after India, the world's largest gold consumer, raised import duty on gold to 10 percent as policymakers scrambled to narrow a persistent current account deficit.

Gold for December delivery closed lower by $13.70, or 1 percent to settle at $1,320.50 a troy ounce on the Comex division of the New York Mercantile Exchange.

Finance Minister Palaniappan Chidambaram told parliament on Monday that India would seek to reduce imports of gold, silver and "non-essential" imports, while also curbing demand for oil to contain the current account deficit at $70 billion for the fiscal year ending in March, or an estimated 3.7 percent of GDP.

AP

This is India's fifth increase in gold import taxes in the past year and a half to curb imports and raise capital inflows to relieve the grinding pressure on the rupee which hit a record low of 61.80 against the dollar last week. The move comes as imports of gold revived to $2.9 billion in July despite an 8 percent customs duty on gold which had initially appeared to stem demand.

The finance minister has now hiked the import duty on gold to a record 10 percent, while also raising excise duty on the metal.

"There's no question that Indian gold curbs are definitely hurting demand ... that's kind of the knee-jerk reaction in the market today," Graham Leighton, a precious metals broker with Marex Spectron, told The Wall Street Journal.

The Reserve Bank of India has also told regional banks they can no longer provide loans against gold jewellery - the latest move to discourage gold buying as the government seeks to reduce a gaping current account deficit. There's logic to this as gold is India's second-biggest import cost after crude oil.

Experts, however, say addressing India's inflation and low real interest rates would have more of an impact on the current account deficit than curbs and duty hikes on gold.

"While gold has certainly played a role in India's trade deficits, there are other factors influencing the account deficit that need to be addressed. Indian exports have contracted, inflation has risen to over 7 percent, and the rupee is ever-weakening keeping foreign investors well at bay. India's economy is stalling and grew at its slowest pace in 10 years, recording just 5.0 percent growth in the fiscal year ending this past March," Scott Carter, Chief Executive Officer of Los Angeles-based Lear Capital, told Firstpost.

"Gold demand has increased precisely because of rising inflation and scant savings amongst the Indian populace. So, India may need to examine its monetary policy rather than taxing the only store of value available to the Indian consumer," added Carter.

Rural Indian communities are particularly hungry for gold as an investment and collateral but India's gold purchases have been under consistent pressure from government efforts to stem imports this year. Analysts also fear that duties on gold may just increase smuggling.

Gold on Tuesday also faced pressure from a stronger dollar, which gained ground against a mix of international currencies. Dollar-denominated commodities such as gold tend to come under pressure when the dollar becomes stronger.

Gold's demand is fueled primarily by Asian markets and an appetite for gold jewelry, coins and bars in India, China and the Middle East. India is the world's largest gold consumer, accounting for about 30 percent of demand.